Kmart's new recession play: Discounts for the unemployed

Retailers may be seeing some improvement in their businesses, but they have one big challenge ahead: A lot of their customers are still out of work.

So Kmart has come up with a novel way to hang on to those customers until they're back at work and spending freely by giving them discounts now. The chain has introduced a Smart Assist program that will give the unemployed nationwide a 20 percent discount off 1,500 food and household staples from Kmart's various store brands.

The program was tested this summer in Michigan -- the first state to top 15 percent unemployment in 25 years -- and Kmart got praise there from the governor and the mayor of Detroit.

There are a few catches: The discount cards, which will be issued through January 2010, are only good for six months -- less time than many Detroit auto workers have been out of work. And while shoppers can apply privately on-line, they still have to present their unemployment documentation at checkout to use their discount card.

After a back-to-school season when parents had to put pencils and notebooks on layaway to make ends meet, the fear that a "jobless recovery" will gum up the works is very real. It's coloring even the rosier holiday sales forecasts.

Sears Holdings Corp. (SHLD), parent of the Kmart and Sears chains, has been zeroing in on customers who are tight for cash, in an effort to turn around its slipping fortunes. It has been pushing layaway for the last two holiday seasons at both chains and introduced a Christmas Club savings program to boost holiday sales.

While Kmart is probably the largest and most high-profile business to market to the unemployed, it's a tactic that small businesses have been using for a while. Throughout the recession, reports have trickled in about local merchants in hard-hit areas offering discounts to laid-off workers. One German brothel has reportedly offered 20 percent discounts to customers who can show they're on the dole.

It's marketing 101: it's easier to keep an existing customer than go out and rope in a new one. Customer loyalty is a tricky thing.

U.S. Representative John Dingell (D-Michigan) acknowledged as much when he praised Kmart. "These displaced workers will -- like our state itself -- get back on their feet and remember those who helped during this time of hardship," he said in a statement.

Discreetly offering cash-strapped regulars discounts keeps them in the fold when times get flush again. And with all the talk about a "new frugality" taking hold, retailers should keep that in mind if they want to get a share of shoppers' wallets once things turn around.